Asset managers overseeing £171 billion in local government pension funds could face billions in outflows if councils sign up to a proposal for a central pool for passive investments.

The proposal is part of a report on structural reforms to the Local Government Pension Scheme in England and Wales by consultancy Hymans Robertson, which has yet to be published.

People briefed on the report said the proposals include setting up pooled, passive investment vehicles tracking indices that local government funds across the country could access. They would comprise a small number of potentially giant investment funds which could have a very low fee structure.

Another proposal involves creating collective funds for alternative investments instead of each local government fund investing in expensive fund-of-fund vehicles.

The report will trigger big changes to local government schemes, which are under pressure from the government to cut expenses.

Collectively, the 89 funds, with 4.6 million members, make up the fourth-largest pension scheme in the world. A previous report by Hymans Robertson indicated they may be paying as much as £953 million in investment management fees a year.

Hymans Robertson declined to provide details of the contents of its latest report.

One person familiar with the Hymans Robertson proposals said they were an elegant solution that could achieve lower costs without full mergers, which could take a long time to arrange. The person said: “Fund mergers are legally complex and take time to do. They raise all kinds of implementation issues, so finding a way of pooling the investments is probably the option that is going to go on the table.”

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However, Brian Sutton, LGPS board member and public services national secretary for the union GMB, said: “Ideas like collaborations, CIVs [common investment vehicles], mergers, frameworks, passive/active management, centralised procurement, will all have their place but there is no one-size-fits-all. As yet nobody has come up with any ideas for dealing with the problem of fund deficits which, in my opinion, dwarfs all other issues.”

Daniel Godfrey, chief executive of the Investment Management Association, said: “If they are saying that many of these funds will have a passive component, and we can save money by bringing all the passive investments together, that may be feasible.

“But if they are saying that a way of saving costs is to change the allocation basis from active and towards passive, I suppose that would reduce costs but I think it is not a given that it would improve outcomes.”

Financial News has already reported that one of the Hymans Robertson advisers working on the report has questioned the value of active management.

The UK’s local government funds have about £109 billion under active management, around 75% of total funds.